Trade Ideas Blog

1 Stock’s Collapse Reveals a Pattern Others Might Follow

Apr 7, 2008

As many of our subscribers confirm – our technology works – really well. Here’s an example that features option filters recently added and Bear Stearns. I think this example is more relevant as we prepare to absorb one of the last of the giants in the financial sector that’s been exposed to the sub-prime mortgage disaster: Citibank (its earnings are scheduled for release on April 18th).

Let’s review the timeline that was the BSC collapse – as summarized by our friends at FierceFinance:
I recall CNBC’s Fast Money talker, Jon Najarian, talking about put option contracts valuing BSC at $20 – shocking at the time when BSC was trading in the $60s. That was crazy talk! Or was it?
A Startling Case of Foreshadowing
Source: Trade-Ideas data
Take a look at the raw data Trade-Ideas’ servers were recording during this fateful week for BSC – pay notice to the ‘Prev Put Volume’ column:
From Monday, March 10th to Tuesday, March 11th (a whole day before the rumors started flying), Trade-Ideas picked up a 5-fold increase!!!
I don’t care about who knew what before the official news – if this is a pattern that can alert me to future massive sell-offs before they happen, then I’m simply letting Trade-Ideas be my eyes on the market – looking for previously unseen patterns and bringing them to my attention for action.

Specifically: Can a higher than usual spike in put-option volume lead to a significant drop-off in price? How large must the unusual volume be? How long is the optimal time to hold a possible short position?
I plan on putting together a strategy that answers these questions for us and watch as we approach the Citibank earnings release. Until I post that strategy, here are the raw ingredients I will be using to build it:

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